THE LINKAGE BETWEEN REAL ESTATE PRICES AND THE MACRO-ECONOMY IN CROATIA: VAR APPROACH

Abstract

The aim of this paper is to investigate the interrelation between the housing sector and macroeconomy in Croatia. It focuses on the housing sector as a source of volatility and studies whether the changes in house prices easily spillover to the rest of the economy. Furthermore, it studies how domestic variables, especially financial conditions, influence house prices. Finally, as Croatia is a small open economy, the responses of housing prices and other domestic variables to external shocks were explored. For the purpose of our research, a five variable structural vector autoregressive (SVAR) model comprising both domestic and foreign variables was used imposing block-exogeneity restrictions and assuming that domestic shocks have no significant impact on foreign variable. The model suggests that the developments in house prices and other domestic variables were mainly caused by external shocks. However, the changes in real estate prices have important influence on domestic variables in Croatia.

Keywords

• real estate prices
• financial conditions index
• external shocks
• SVAR model
• block-exogeneity restrictions